GASB 74 and 75 Change Higher Education Financial Reporting for OPEB
GASB Statements 74 and 75, issued in June of 2015, will change how other postemployment benefits (OPEB) will be accounted for and disclosed within public higher education institutions’ financial statements. While there are many similarities between the pension standards (GASB 67 and 68) and the OPEB standards (GASB 74 and 75), there are plenty of substantial changes to be aware of and prepare for. The adoption of GASB 75, in particular, has the potential to significantly increase OPEB liabilities.
To get a clear picture of precisely what will be different, a review of current standards and a comparative analysis of the various statements will be helpful.
Current OPEB accounting and reporting under GASB 45
Currently, OPEB plans are accounted for under the guidance of GASB 43 and 45. If your institution participates in a cost-sharing, multiple-employer plan (e.g., a state plan) that qualifies as a formal trust, OPEB expense is recorded equal to the contractually required contribution. Any difference between the contractually required contribution and the amount actually paid is reported as an OPEB asset or liability. Chances are you have no liability currently recorded, assuming you pay the amount due the plan annually.
If you institution has a single-employer plan or agent multiple-employer plan, an actuary is engaged to calculate an annual required contribution (ARC) using methods defined within GASB 45. For each reporting period, a contribution deficiency or excess is calculated as the difference between the ARC and the employer’s contributions. Cumulative OPEB contributions that are underfunded or overfunded result in a net OPEB obligation or asset reported on the statement of net position. In practice, many of these plans are underfunded and result in a liability at yearend.
OPEB accounting and reporting under GASB 75
GASB 74 and 75 establish similar guidance to OPEB accounting and reporting as GASB 67 and 68 did for pension plan accounting. For single-employer and agent multiple-employer OPEB plans, a net OPEB liability (asset), payables to OPEB plans, and deferred outflows and inflows of resources related to certain changes in the net OPEB liability (asset) not yet recognized in the OPEB expense will be recognized on the statement of net position. The net OPEB liability (asset) is computed as the difference between the actuarial present value of projected benefit payments attributed to past periods of employee service and the OPEB plan’s fiduciary net position.
For employers in cost-sharing OPEB plans, your proportionate share of the collective totals will need to be recognized in the financial statements. These collective totals are measured using the same methodology for single-employer and agent multiple-employer plans.
Comparing GASB 45 to GASB 75
The most notable difference between GASB 45 and 75 is that employers participating in a cost-sharing plan will be required to record their proportionate share of the plan liability and deferred inflows and outflows of resources. If you have made 100 percent of your contractually required employer contributions in the past (and therefore had no OPEB liability), there will now be a requirement to record a liability.
Some other notable differences include:
- Under the guidance of GASB 45, an employer was able to choose between six different cost allocation methods. GASB 75 requires everyone to use the same method (the entry age normal level percent). Use of a different actuarial method can change the amount of the OPEB liability.
- GASB 75 defines the net OPEB liability as the present value of benefits accrued to date by employees less the plan’s fiduciary net position. GASB 45 defines the net OPEB obligation as equal to OPEB expense less employer-paid benefits, plus contributions to the OPEB trust.
- Certain changes such as investment gains (losses), plan changes, and assumption changes were usually amortized over 30 years under GASB 45; the amortization period will vary under GASB 75 but generally will be much shorter.
- Significant changes are required to the footnote disclosures and required supplementary information. This will add to the total number of pages in your notes to the financial statements. These requirements are similar to those of GASB 67 and 68.
Comparing GASB 74 and 75 to GASB 67 and 68
While planning for the implementation of GASB 74 and 75, there are striking similarities to GASB 67 and 68. The same method is required for determining the discount rate and deferred inflows and outflows. The cost method is the same (entry age normal). There are additional sensitivity measures for both discount rate and trend rate, a more rapid recognition of actuarial gains and losses, and changes in actuarial assumptions for OPEB expense.
Some differences to consider when planning for GASBs 74 and 75 include:
- The discount rate for both pensions and OPEB measurements are determined by first looking at the long-term expected rate of return on plan investments. If returns are projected to be sufficient to make projected benefit payments, the discount rate is equal to the return on plan investments. If the projection does not meet benefit payments, then an index rate for a 20-year, tax-exempt municipal bond with an AA/Aa or higher rating is used. In practice, most pension plans have higher funding percentages than OPEB plans, and many OPEB plans have no investments set aside in a trust for the payment of projected benefits. As a result, discount rates utilized for the OPEB plans could be significantly lower than those used for pension plans, which would increase the net OPEB liability.
- It is probable that the GASB 75 net OPEB liability may be greater than current GASB 45 unfunded actuarial accrued liability.
GASB 74 and 75 implementation dates
The new standards outlined in GASB 74 (for OPEB plans) must be applied in annual reporting periods after June 15, 2016. Those outlined in GASB 75 (for employers) must be applied in annual reporting periods after June 15, 2017.
How we can help
Your public higher education institution should begin evaluation how the changes will impact your financial statements and budgets. CLA has several resources here on our website that may be helpful in understanding what’s ahead and what you can do to prepare. Our public colleges and universities practitioners can help your organization understand and comply with the provisions laid out in GASB 74 and 75.